Over the last two months, the largely veiled Brooklyn-based developer has seen the bonds that he issued in Israel downgraded; investors have begun shorting All Year; and the company has come under the spotlight from Israeli regulators.

It all started after the company revealed a $3.7 million error in November 2018, triggering a weeks-long decline in their bonds on the Tel Aviv Stock Exchange (TASE), and heightened scrutiny from investors and regulators. As of last Friday, All Year’s four bond series had fallen between 6 and 23 percent since the beginning of 2019.

In the wake of that revelation more questions were raised, among them All Year’s practice of reporting income from developments that have not been fully leased yet, which have spooked Israeli bondholders, who have bankrolled much of Goldman’s empire, according to discussions with several investors and other stakeholders familiar with the Israeli market.

On Jan. 15, a group of bondholders filed a class-action lawsuit against All Year in a Tel Aviv court, arguing that the company had breached securities laws by failing to disclose certain details about the $3.7 million transfer, and claiming damages of at least NIS $2.5 million, or $680,000, according to the complaint.

All Year’s troubles come amid a tumultuous period on the Tel Aviv bond market that began in November, and all of the American companies who raised money in Israel were affected. Companies like GFI Real Estate, Starwood Capital, Spencer Equity and Delshah Capitalhave been trading at double-digit yields since December, and an index that tracks primarily American companies on the TASE fell by 3 percent since the beginning of 2019.

“All Year was one of the triggers that sent the market down, because that’s what made people realize that the corporate governance was lacking,” said one finance lawyer who works with foreign bond companies in Israel.

In the beginning….

Four years ago, Goldman, then a rental landlord and budding developer, made his first pitch to the Israeli bond market. He came to the Tel Aviv with a portfolio of mostly Brooklyn rental properties worth roughly $450 million in assets, according to public documents from All Year.

Goldman’s offer was perfectly timed to the height of the real estate frenzy in Brooklyn. Prices in the borough had risen astronomically in a decade and were continuing to climb at an astonishing pace. Everyone wanted to get in on the ‘next Williamsburg’ before it became the ‘new Williamsburg.’

Goldman was well-positioned to capitalize on the market because of his history in the borough, and when the option to issue debt in Israel opened up, he seized it. Since his first bond offer in 2015, Goldman’s All Year has nearly quintupled, with assets totaling $2.2 billion, according to the company’s latest financial statements, and he has become one of the more high-profile developers in Brooklyn. His projects include The William Vale hotel and The Azure at 436 Albee Square, which he developed with partners, 1040 Dean in Crown Heights and a massive, two-phase rental complex in Bushwick named Denizen, at 54 Noll Street and 123 Melrose Street, which is still under development.

A large portion of that development activity is funded by debt raised in Israel. Since 2015, Goldman has raised roughly $650 million in five bond series, issued by a corporate entity called All Year Holdings, which is incorporated in the British Virgin Islands, and owns a portfolio of over 150 properties. Two of All Year’s bonds are secured by properties in Brooklyn, and all of them are backed by the corporate entity.

“When he came to Israel he was a small player,” one investment executive said about Goldman. “The Israeli bonds made him an empire.”

Then All Year’s uninterrupted gold streak floundered.

The trigger

In late November 2018, All Year reported to the TASE that in June of that year, the company had accidentally transferred $3.7 million from the coffers of the bond portfolio to a lender on a property owned by Goldman outside the bond company, and immediately corrected its mistake by returning the funds. Goldman initially shrugged off concerns, pointing out in a call to investors, that it was his own auditors who had found the error. “The company is [sic] who found the mistake,” Goldman said on the call. “We did have a good system and it worked.”

With the market already in turmoil, the Israel Securities Authority (ISA) began to ask questions about how the accidental transfer had occurred, according to All Year in a TASE filing. All Year explained that the error was connected to a financing deal for two separate mortgages from TNW, a joint venture between Ran Eliasaf of Northwind Group and Joseph Tabak of Princeton Holdings. One loan was backed by five properties in the bond portfolio, and another was for five properties that Goldman owns outside the bond company. The title company who had managed the two loans had mixed them up, All Year reported, and sent funds meant for the Israeli entity to a lender on one of Goldman’s properties not controlled by the bond company.

Shortly after, it emerged that according to a mortgage document filed in New York, the two mortgages were in fact one, totaling $39 million and spread across the 10 properties. That arguably meant Goldman had cross-collateralized properties inside and outside the bond portfolio, exposing bondholders to risks over which they had no recourse. In addition, under securities law, All Year would have needed approval for such a deal, and would have been required to disclose it, as well.

In a notice filed to TASE in the beginning of January, All Year conceded that it was one loan and not two, but argued that if it had disclosed the nature of the deal before it closed, it still would have been approved because appropriate protections were in place. All Year also refiled its second and third quarter reports to correct for the $3.7 million, under instructions from the ISA.

Just before that, in December, All Year’s bonds were downgraded by Israeli rating agency Midroog after failing to meet a required leverage ratio in the third quarter of 2018.

“The reduction of the leverage ratios, combined with the failure to maintain material liquidity balances for the purposes of the bond service affects negatively on the company’s financial profile,” the report from Midroog states, in Hebrew.

In the wake of those disclosures, several financial firms launched their own independent investigations into All Year’s finances, according to information provided to Commercial Observer under the condition of anonymity, and a number of other arguably dicey practices have been brought to light.

“The problem is whether [All Year] will be able to regain trust,” said one executive at an investment bank. “The market doesn’t trust the [American] companies and the facts that they’re putting out.”

After multiple attempts to contact the ISA, a representative said that no one would be available to comment until after publication. Goldman declined to comment for this story.

Master leases

Denizen, the latest of Goldman’s eye-catching developments, is located on what was formerly the Rheingold Brewery site. It was designed by ODA Architecture and marketed to the new influx of Bushwick locals. Its design incorporates dazzling art displays from local artists, the amenity package includes an on-site beer brewery and Zen gardens, and the attached retail and green spaces are meant to be a draw to the neighborhood.

Denizen launched residential sales for its first phase of 443 out of 911 apartments last summer. The retail section is not yet operational, but has at least one signed retail tenant, a Foodtown that will take 15,000 square feet, according to The Real Deal.

Goldman has three master leases at Denizen, per Goldman’s public documents, in addition to at least four more at three other developments.

All Year leases portions of its properties to an intermediary, who begins paying rent during the lease-up phase, so that unfinished developments (or unstarted ones) begin yielding rent before they’re fully leased. The advantage for tenants is that they typically pay a below-market rent and it allows All Year to begin reporting income earlier in the development process, and thus meet the leverage ratios imposed on it by bond covenants. This pattern is consistent across Goldman’s large mixed-use projects he has developed in the last several years.

The lessees in all these deals have signed five- to 10-year agreements to pay a fixed amount of rent for a portion of the building, either residential or commercial, usually before the development is completed.

Joshua Stein, a New York-based real estate lawyer not involved with All Year, said that the master-lease structure for pre-stabilized developments is an “established mechanism.” It can be a tradeoff for developers who are willing to forgo a higher rent in the future, for income now, often in order to secure financing, Stein explained. “You create those [long-term leases] to generate rental income, which you then use to backstop higher mortgage financing.” But the “ability to goose the loan” proceeds would depend on creditworthiness and the lease terms, he added.

Because this is such an integral part of the way All Year conducts business, this practice is combined with All Year’s lack of transparency about its tenants, has made investors and other stakeholders pay closer attention to All Year’s dealing which have uncovered several red flags in their view.

At Denizen, all three master leases for the project’s first phase, one retail and two residential, are with the same tenant, an unidentified entity named The NY Zen LLC. Goldman signed agreements with this tenant on the last day of each quarter for the last three quarters, just in time to record the net operating income, or NOI, for that period’s financial statement. The tenant has two five-year leases for a total of 342 of 443 apartments and is paying a fixed rate beginning at $12.4 million per year, and a 10-year lease beginning at $2.2 million for the 78,661-square-foot retail portion, both of which increase 3 percent per year.

The retail lease for Denizen was signed on March 30, 2018, according to the first-quarter report filed with TASE in May. However, The NY Zen LLC was incorporated on May 24, 2018. In addition, the LLC shares an address and suite number with All Year.

Both of those facts are important because All Year has always claimed that the master lessees are unaffiliated with his company. If they are, the company is required to disclose that to its bondholders, as well as the identities of the tenants, according to securities rules in Israel.

In a call with investors in early December 2018, All Year explained that the reason they shared an address was because they had helped the tenant incorporate the LLC.

At The Azure, a mixed-use building in Downtown Brooklyn, co-developed by Goldman and Spencer Equity, the names of the two master lessees, both private individuals, were reported but no additional information provided.

In a public statement published on TASE in mid-January, in the wake of media reports addressing the issue of the master leases, Goldman wrote that he’s not required to disclose the identities of the tenants because they are third parties in an arms-length transaction. Regarding his dependence on income from the master lessees, Goldman stated that the concerns are “divorced from reality,” according to the response. “A large portion of the property that’s master leased is occupied, and the remaining spaces are in the negotiation process with final tenants,” Goldman wrote.

Walworth Street

Another All Year property has raised concerns for investors: the lot at 94 Walworth Street. Itis walled off by green plywood, on which bright Yiddish advertisements are plastered next to a scrawled “No Parking” warning. It’s a typical sight in this part of Brooklyn where low industrial blocks are rapidly transforming into bustling residential areas to accommodate the growing population of Orthodox Jews and L-train riders.

The vacant green-gated lot is one of the company’s top 20 income-producing properties, according to All Year’s 2017 yearend report, generating $1.3 million a year in rent from an unidentified tenant, per public financial statements from the company.

The space at 94 Walworth had been ground leased since December 2016, with a 20-year term, All Year’s report indicates, and the tenant intends to develop the property. As part of the deal, All Year agreed to put aside $4 million for the costs of development. No building permits have been filed for the address, which is zoned for industrial use, according to the New York City Department of Buildings.

According to one developer, while ground leases for development properties certainly exist they are usually for 50- or 99-year terms, long enough to recoup the costs of development. As for a 20-year term, “No one would do that,” the developer said, because they wouldn’t make the money back in that time.

In a response filed on TASE regarding similar questions raised in the Israeli publication Calcalist, All Year stated that they were misleading, and that, “This is a customary ground lease in cases where the lessee wishes to build an asset on the land.”

Covenants

There’s a reason why All Year is under pressure to report income. As a public company, All Year is required to meet certain leverage ratios under the terms of its bonds, including a debt to income ratio known as EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization). If the company breaches those covenants, there are penalties, such as increases in interest rates, or an opportunity for bondholders to demand immediate payback.

With so many large projects under development, All Year has been wavering above a ratio of 18 times debt to EBITDA, just below the allowed threshold of 19 to one. In the third quarter of 2018, All Year reported total debt of $1.5 billion and EBITDA of $83.5 million for a ratio of 18.4, meaning a difference of $3 million would have put him over the threshold.

While the covenant is meant to protect bondholders, it isn’t always the only metric that gauges the health of a company.

However, for a public company, lack of confidence can be a self-fulfilling prophecy. Once bondholders have lost faith in a company, that devalues the bonds or shares, making it more difficult for the developer to meet their financing goals, refinance their debt, and manage their business.

In a call to investors in December, Goldman vowed to do everything in his power to regain the confidence of his bondholders. He has his work cut out for him.